The smiles of the
General Assembly’s
Republican majority and
Democrat Governor
Terry McAuliffe and officials
in his administration
over the recently
announced $132 million
budget surplus were the
equal product of both
relief and bravado. Each
took credit for the extra
money while at the same
time taking a deep breath
that no more cuts were
needed to get to the legally
required equilibrium
of tax revenue and expenditures
— especially
relieved not to have to
renege again on long
promised pay raises for
state employees and state
police.

The governor
said his efforts to diversify
Virginia’s economy,
especially from dwindling
federal government
spending in the commonwealth,
generated the
revenue. Republicans
claimed their responsible
stewardship of a weak
revenue stream due to
eight years of a weak
economy made the grade.
But in politics and government
the next question
presents itself before
you can finish taking
credit. In this case, what
to do with the extra cash?

While $132 million
may sound like a lot
of money, the clearing of
the flat line hurdle only
came to pass from an
end-of-fiscal-year flurry
— a record for monthly
revenue in June, the last
month of the fiscal year
— of $2.2 billion.
Revenue in two recent
budget cycles did not
clear forecasts, requiring
cuts in projected spending
plans. In what seems
like a case of fiscal
Russian Roulette,
Virginia’s budget is crafted
by appropriating
money the state projects
will come in, not what it
already has. Anything
less requires a retroactive
review aimed at cutting
areas of the spending
plan or a draw down on
the "Rainy Day Fund”
revenue fund.

Officially known
as the Revenue
Stabilization Fund, it
receives its own appropriation
each budget
cycle. In some respects,
then, we are paying ourselves
and that money
should cover any shortfall.
By law, money from
the fund can only be used
in certain circumstances.
In addition, the General
Assembly recently adopted
a new revenue reserve
fund, which by law
requires at least 50 percent
of any surplus to be
deposited in it. House
Majority Leader Kirk Cox
(R-Colonial Heights) and
likely the next speaker,
and House Appropriations Committee Chairman
Chris Jones (R-Suffolk)
want all $132 million
deposited in the new
fund to guard against
continued economic
uncertainty.

The two argue
that such prudence will
ensure Virginia’s coveted
triple-A bond rating, the
highest given by the three
major credit rating agencies,
which provides
access to the lowest possible
interest rates when
borrowing is necessary.
Virginia has maintained a
triple-A rating for 70
years, the longest run of
any state in the nation.
One such rating agency,
S&P Global Ratings, cautioned
Virginia in April
on its reliance in keeping
the books balanced (in
2014 and 2016) by dipping
into the Rainy Day
Fund. While it maintained
Virginia’s triple-A
rating, it revised its outlook
from stable to negative
based on the slow
rate of economic recovery
compared to other states
and what it believes is a
continued reliance on
unreliable federal government
spending on
defense and other programs
from which
Virginia traditionally
benefits.

Last year, revenue
projections fell short
by $1.5 billion. This year’s
surplus is in part due to a
downward revised revenue
forecast of a 2.9 percent
increase in collections.
The actual number
came in around 3.6 percent.
State income tax
withholdings are the
largest source of revenue
for the state, accounting
for about two-thirds of
the general fund. That
money grew by 5.2 percent
compared to a forecast
of 3.6 percent, a $182
million windfall.
Corporate income taxes
increased by 8.1 percent
compared to a 3.8 percent
forecast, for a $32 million
increase.

However, there
were areas of weakness.
Sales taxes collections
were 1 percent less than
forecast, which resulted
in a $29 million shortfall.
Taxes on capital gains
were $30 million less than
forecast, and taxes on
recordations, wills,
deeds, insurance and
lawsuits also fell below
projections. The administration
will provide the
General Assembly’s three
money committees full
details of the final figures
when McAuliffe briefs
them in August.